Become a Better Business Cashflow Manager

Cash can be elusive in a business. You and your team are flat out, sales are up, but the bank account doesn’t show it and tax or bill due dates come around way too quickly.

Improving business cashflow can seem like an overwhelming task. It’s a combination of so many moving parts, it’s hard to know where to start. The good news is that like any aspect in your business, cash flow is a system that you can easily manage. By setting up your processes right and scheduling necessary checks, cashflow will basically manage itself! When it’s under control you’re freed up from trying to keep cashflow going, so you can focus on what you do best – running your business.

1. Keep your numbers up to date

For any company director to understand the financial performance and position of their business, they require up-to-date numbers. Proactive bookkeepers and accountants, teamed with cloud accounting software, particularly Xero, has made it easier than ever to keep your financials accurate and up to date.

Outdated and inaccurate records is a sign of potential insolvency. Perhaps your numbers don’t look right, or you haven’t looked at them for weeks or months. If this sounds like you, act immediately to update your records or get in touch with your accountant to organise a professional bookkeeper to bring things up to speed. It may become an extra expense for your business, but one that will help you to avoid insolvency and keep your numbers up to date.

2. Forecast to freedom

The first place to start is with a cashflow forecast. To avoid it becoming an overwhelming task, only get as detailed as you need. It could be as simple as calculating the cash you need to put aside each week to pay your BAS and super each quarter, to a detailed 13-week rolling forecast or dedicated software reporting. Think about where you’ve had tight cashflow before to avoid the most serious situations. Your bookkeeper or accountant is your friend here as they will be able to help set you up with the right system and processes. Once you know how it works, it’s simple – and is the best way to keep on top of your cashflow difficulties.

The types of transaction to include in a detailed cashflow forecast:

Revenue, rebates and government funding,

Rent, wages, superannuation, insurance and other trading costs,

GST and PAYG tax payable on your ATO activity statements,

Finance and loan payments, and

Further investment planned for the business.

Once you have a better handle on your cashflow you can then take steps to improve it.

3. Speed up the inflows

If your business gives customers credit, get those invoices paid! Although it can seem hard, every business faces the same challenge. But there are steps you can take to speed up the time it takes customers to pay you.

Ideally, you can invoice and be paid before you start work, but this is not an option in some industries. In this case, seek to be paid half your quote or invoice up-front with the balance on completion.

When you complete the work, ensure invoices are issued at that time. Waiting days to issue invoices adds unnecessary delays to your payment cycle or worse, it can mean you miss a monthly pay run. It also helps to give customers various payment options including by credit card.

To ensure you get paid for the work you do – make sure you do your checks on new customers and existing customers with large accounts or patchy payments. Chase payments early to keep your accounts receivable within 30 days and improve collectability. Where you’re having trouble getting paid, don’t be afraid to engage professional debt collectors. Otherwise, you’re allowing your customers to use you as a bank which can result in long periods of unpaid debt, especially if you don’t have the time to chase them yourself.

4. Slow down the outflows

Cashflow problems often occur because customers pay slower than a business pays its suppliers. To minimise this, advise your suppliers of your own supplier payment timeframes. Alternatively, if this is not possible, pay supplier invoices on or just before their due dates.

If your suppliers invoice you on a monthly basis, consider purchasing early in the month to maximise the period of credit. That way you’re holding onto your cash as long as you can before paying it out.

If you are experiencing tight cashflow, ask your suppliers for an extension of their payment terms or agree on an instalment plan. Suppliers will generally work with you if you’re up-front and show you are making genuine efforts to get them paid.

5. Free up cash in excess assets

Only purchase the stock and equipment you need. Clear stock that’s moving slowly or becoming obsolete. It’s no good on your shelves and it’s no good on your financial statements.

Additionally, holding onto equipment that’s no longer fit for purpose can be a cash-drain. Maintenance costs, finance payments and the space it takes up are all resources that could be used elsewhere in your business.

6. Don’t grow broke

A growing business can look good on paper, but actually be in a cash crisis. Business growth requires investment – more staff, stock, marketing, overheads…everything.

It’s particularly important for a business which is growing rapidly to forecast and closely monitor cashflow. Everything speeds up with a high-growth business so it’s essential to identify and deal with cashflow shortages well ahead of time to avoid the threat of insolvency. Naturally flowing on from this is the need to secure the right funding. To continue meeting expenses while fuelling the growth of your business, you need to make sure you have sufficient cash available.

7. Cashflow finance

Cashflow finance is often the first solution to a cashflow crisis that business owners investigate.

With unsecured loans now incredibly easy (too easy) to obtain, company directors will often apply online, bypassing their professional advisors. Next thing they know, the cash is gone and their situation is worsened by the additional finance payments – often required weekly at 25%-40% interest.

Ideally, we believe cashflow finance should only be looked at once you have worked through the above points for a few reasons:

Without fixing the causes of the cashflow problems in your business, it is like a leaking bucket. The new money will quickly disappear leaving a debt and increased repayments.

Better cashflow management can lessen the reliance on finance and will more easily obtain finance and at cheaper interest rates.

Finance should have a specific purpose such as buying a new asset, implementing a growth strategy or paying out another debt.